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Volume 15, Number 2 November/December 2005
A lesson in drafting contracts
What's up with 'representations and warranties'?
By Kenneth A. Adams
Legalese is sometimes necessary. But sometimes, it's not.
In corporate agreements, assertions of fact are referred to as representations and
warranties. Unless, that is, they're referred to simply as representations. Or
referred to simply as warranties. Likewise, a party will represent and warrant as
to one or more facts, unless it just represents or just warrants.
Using pairs of synonyms, or near synonyms, in legal writing suggests bloat, and
using different words to convey the same meaning is a reliable sign of confusion.
One is entitled to wonder whether drafters wouldn't be better served by opting for
one noun (and verb) and sticking with it.
It may come as a surprise, but the answer is that they certainly would. For
clearer, more concise, and more disciplined drafting, you should, except when
waiving implied warranties, steer clear of warranty and its verb equivalent and
instead refer to assertions of fact as representations and have the parties
represent.
Reaching this conclusion requires a three-step analysis. First, one must ask how,
for general contract-law purposes, one distinguishes between representation and
warranty.
(This
article
doesn't
consider
the
specialized
definitions of
representation and warranty for purposes of insurance contracts.) Second, one
must consider how courts construe these words as they're used in contracts. And
third, one must consider what the costs are of continuing to follow custom by
using in one's drafting the couplets representations and warranties and represents
CALENDAR
and warrants.
The literature on drafting is largely silent on the distinction between
representations and warranties, with only a handful of commentators taking a
half-hearted stab at it. The most assertive take is that offered in the Model Stock
Purchase Agreement (1995) and Model Asset Purchase Agreement (2001) — both
published by the ABA's Section of Business Law — which state that
"representations are statements of past or existing facts and warranties are
promises that existing or future facts are or will be true." But Krys v. Henderson,
69 S.E.2d 635, 637 (Ga. Ct. App. 1952), is the only case I have found that stands
squarely for this distinction. If you examine the question anew, you discover that
the actual distinction is rather more subtle.
Of the two words, representation is the more straightforward. Black's Law
Dictionary defines representation as "A presentation of fact — either by words or
by conduct — made to induce someone to act, esp. to enter into a contract."
Related to the concept of a representation is the tort of misrepresentation. Section
159 of the Restatement (Second) of Contracts says that "A misrepresentation is
an assertion that is not in accord with the facts." One can have fraudulent,
negligent and innocent misrepresentation; these are discussed in sections 526,
552 and 552C, respectively, of the Restatement (Second) of Torts.
To constitute misrepresentation, an assertion must relate to something that is a
fact at the time the assertion is made, in other words past events or current
circumstances but not future events. (See comment c of Section 159 of the
Restatement (Second) of Contracts.) That is presumably what underlies the notion
stated in the Model Stock Purchase Agreement and Model Asset Purchase
Agreement that statements of future facts do not constitute representations.
But it doesn't follow that the meaning of representation must be linked to the
elements of an action for misrepresentation. Indeed, references to representations
as to a future event are commonplace in general legal usage. To pick two
examples at random, 37 American Jurisprudence, 2d Fraud and Deceit §§ 80
refers to "the test to determine whether a representation is of an existing fact or
of a futurity," and in Smith v. Waste Management, 407 F.3d 381, 382 (5th Cir.
2005), the court refers to "representations about Waste Management's future
earnings."
Regarding the meaning of warranty, under common law an express warranty is a
seller's affirmation of fact to the buyer, as an inducement to sale, regarding the
quality or quantity of goods, title or restrictive covenants to real property. See
Howard O. Hunter, Modern Law of Contracts §§ 9.5 (2004). While the Model Stock
Purchase Agreement and Model Asset Purchase Agreement say otherwise, there is
no reason why a warranty shouldn't be of a past fact, such as the date a car was
manufactured.
Because the majority of warranty cases today arise under the Uniform Commercial
Code, the modern common law of warranties is of somewhat limited application.
But important warranty law applications do fall outside the UCC. For example,
cases involving the sale of a business can turn on warranties made by the seller.
See, for example, Quality Wash Group V, Ltd. v. Hallak, 58 Cal. Rptr. 2d 592 (Cal.
Ct. App. 1996); CBS v. Ziff-Davis Publishing, 553 N.E.2d 997 (N.Y. 1990).
Regarding the UCC definition of express warranty, UCC §§ 2-303 states in
pertinent part that "Any affirmation of fact or promise made by the seller to the
buyer which relates to the goods and becomes part of the basis of the bargain
creates an express warranty that the goods shall conform to the affirmation or
promise."
Under this definition, a statement of fact can be a warranty (as is the case with
the common law definition of warranty), but so can an obligation. For example, it
is commonplace to refer to as a warranty a contract undertaking to replace
defective parts. See, for example, Schimmer v. Jaguar Cars, 384 F.3d 402, 403
(7th Cir. 2004) (referring to how a car manufacturer had provided a limited
written warranty to repair or replace any nonconformities or defects).
Just as a representation can underlie an action for misrepresentation, an action
for breach of warranty must be based on a warranty. But whereas the definition of
representation is broad enough to include assertions of fact that wouldn't support
an action for misrepresentation, warranty is narrowly construed so as to mean, in
effect, an assertion of fact that would support an action for breach of warranty.
That's why courts don't use warranty terminology in cases that don't involve sales.
So much for the legal meaning of the words representation and warranty; what is
the significance of how these terms are used in contracts? Conceivably, a court
could hold that a party may only bring an action for breach of warranty if the
assertion of fact underlying the claim is referred to as a warranty in the underlying
contract. Or it could hold that for a valid action for misrepresentation, the
assertion of fact underlying the claim must be described as a representation in the
underlying contract.
If courts were in the habit of so holding, how one uses represent and warrant in a
contract would be important, given the significant difference between these
causes of action in terms of the remedies available, the applicable statutes of
limitations, and other matters. And drafters would be justified in preparing for
either alternative by consistently using represents and warrants.
At one time, courts adopted just such an approach. In one famous English case, a
seller who had "affirmed" that his product was a bezoar stone — a kind of
concretion found in certain animals and believed to have occult qualities — was
held not liable for failure to provide such a stone because he had not stated that
he was "warranting." Chandelor v. Lopus, 79 Eng. Rep. 3 (Ex. Ch. 1625).
Courts now take the opposite approach. This is evident, for example, in Quality
Wash Group V, Ltd. v. Hallak, 58 Cal. Rptr. 2d at 596, in the way the court states
that "The seller's warranty provides, in pertinent part, 'Seller makes the following
representations regarding the assets.'" (Emphasis added.) And UCC §§ 2-313(2)
states that "It is not necessary to the creation of an express warranty that the
seller use formal words such as 'warrant' or 'guarantee' or that he have a specific
intention to make a warranty."
By the same token, it would be bizarre for a court to conclude that if a party
warrants as to a given fact, rather than represents or represents and warrants,
the one or more parties to whom that assertion was made would not be entitled
to bring a claim for misrepresentation as to that assertion.
The current approach makes sense. For one thing, representation and warranty
serve to flag an assertion of fact, but they don't affect the meaning of that
assertion. Indeed, the only function of the verbs represent and warrant is to make
it clear who is making the assertion of fact; otherwise, you could have the
assertion of fact stand on its own — the engine is in good operating condition
rather than Jones represents that the engine is in good operating condition.
If you were to require represent or warrant to convey any additional meaning, you
would in effect be speaking in code. If you want to specify what a party's
remedies would be if another party's factual assertions were to prove inaccurate,
your only plausible option would be to address that issue directly.
If the question of what cause of action a party is entitled to bring does not
depend on the terminology used by the party that made the assertion at issue,
then in the appropriate context that assertion could give rise to both a claim for
misrepresentation and a claim for breach of warranty without requiring that the
contract describe the assertion as both a representation and a warranty. That is
what the case law indicates. See, for example, Edwin Bender and Sons v. Ericson
Livestock Commission Co., 421 N.W.2d 766, 770 (Neb. 1988); Newman v.
Kendall, 154 A. 662, 664 (Vt. 1931).
Even though the terminology you use to flag assertions of fact won't have any
effect on the claims a party can bring, you're still left with the task of determining
which term to use. Representation (and represent) is the better choice. It can be
used with all assertions of fact, whereas using warranty in that manner — in other
words, not restricting its use to assertions made in the context of a sale — would
be to do violence to the standard meaning given the term. And representation is
also more narrowly tailored to that task, given that a warranty can also express
an obligation.
You would need the word warranty only for purposes of waiving implied
warranties, such as the implied warranty of merchantability, and in that context
the word would simply serve to refer to legal doctrine.
Of course, you could always follow custom and stick with representations and
warranties. The odds are slim that anyone would ever call you on it, because legal
terms that have ceased to serve — or never did serve — any useful function tend
nevertheless to remain in use, either out of simple aversion to change or because
a given term has acquired an incantatory quality. (That there's an element of
incantation to representations and warranties is suggested by the fact that it's
much less frequently worded as warranties and representations.)
In fact, the converse is more likely to be the case, in that a junior lawyer who
opts for representations rather than representations and warranties may well
come in for harrumphing from higher up the food chain as to how that's not the
way it's done. And anyhow, if which term you use would have no substantive
effect, why not follow tradition?
Here's why not: Whereas the couplet representations and warranties is mildly
annoying when you encounter it a dozen times or more in a contract, you couldn't
say that this usage on its own constitutes a significant problem. But you shouldn't
consider it on its own, because it is invariably joined by many other deficient
usages — other redundant synonyms, the traditional recital of consideration, a
range of archaisms, use of shall to mean anything other than "has a duty to,"
incoherent formatting, use of words and numerals to express numbers, and so
forth.
Together, these usages often render the modern contract an utter chore to draft,
read and interpret. They also encourage a general heedlessness as to meaning,
thereby increasing the odds that a given piece of contract prose will contain a
drafting flaw that results in a dispute or deprives a client of an anticipated benefit.
The only way to improve contract prose would be to attempt to address each of
these deficiencies. Using representations instead of representations and
warranties, and represents instead of represents and warrants, would be as good
a place as any to start.
Adams is the author of A Manual of Style for Contract Drafting (American Bar
Association 2004). He conducts in-house seminars on contract drafting, is a
lecturer at the University of Pennsylvania Law School, and practices corporate
law with Lehman & Eilen LLP. His e-mail is [email protected].
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